MSCI US Equity Indices Methodology

Index Construction Objectives and Methodology for the MSCI US Equity Indices

Contents Section 1: US Equity Indices Methodology Overview... 5 1.1 Introduction... 5 1.2 Defining the US Equity Market Capitalization Segments and Indices... 5 1.2.1 Defining the US Equity Universe... 5 1.2.2 Defining the Market Capitalization Segments and Indices... 6 1.2.2.1 Defining the Large, Mid and Small Market Capitalization Segments and Indices... 7 1.2.3 Market Capitalization Index Reviews and Buffer Zones... 8 1.3 Defining the US Equity Value and Growth Investment Styles and Indices... 9 1.3.1 Multi Factor Approach... 9 1.3.2 Two Dimensional Framework... 10 1.3.3 Index Design... 11 1.3.4 Universe for Style Segmentation... 11 1.3.5 Construction of the Value and Growth Indices... 12 1.4 Free Float Adjusting Constituent Weights in US Equity Indices... 12 1.5 Global Industry Classification Standard (GICS)... 12 1.6 Initial Construction of US Equity Indices and its History... 13 Section 2: Constructing the US MARKET CAPITALIZATION Indices... 14 2.1 Creating the US Equity Universe... 14 2.2 Screening Securities for Investability... 15 2.2.1 Liquidity... 15 2.2.2 Length of Trading... 16 2.2.3 Company and Security Free Float... 17 2.2.4 Relative Security Free Float Adjusted Market Capitalization... 17 2.3 Assigning Securities to Market Capitalization Indices... 18 2.3.1 Preliminary Attribution of Securities to Market Capitalization Indices... 18 2.3.2 Migration of Securities between Market Capitalization Indices... 19 2.3.2.1 Buffer Zones... 19 2.3.2.2 Maximum Length of Time in the Buffer Zones... 20 2.3.3 Final Attribution of Securities to Market Capitalization Indices... 21 2 of 65

2.4 Adjusting the Full Market Capitalization of Selected Securities for Free Float... 21 2.4.1 Defining and Estimating Free Float... 22 2.4.1.1 Estimation of Free Float Available to US Domestic Investors22 2.4.2 Assigning a Free Float Adjustment Factor... 22 2.4.3 Calculating the Free Float Adjusted Security Market Capitalization 22 2.5 Classifying Securities Under the Global Industry Classification Standard (GICS)... 23 Section 3: Constructing the US Value and Growth Indices... 24 3.1 Variables Used to Specify Value and Growth Characteristics... 24 3.2 Standardizing the Variable values for Each Security... 25 3.2.1 Winsorizing the Variables... 25 3.2.2 Calculating the Z Scores... 26 3.3 Aggregating the Style Z Scores... 27 3.3.1 Calculating the Value Z Score... 27 3.3.2 Calculating the Growth Z Score... 27 3.3.3 Identifying the Overall Style Characteristics... 29 3.4 Assigning Initial Style Inclusion Factors... 29 3.4.1 Initial Style Inclusion Factors for Securities with Both Value and Growth or Non Value and Non Growth Characteristics... 29 3.5 Allocating Securities to the Value and Growth Indices... 31 3.5.1 Sorting Securities by Distance from the Origin... 32 3.5.2 Applying Buffer Rules... 32 3.5.3 Allocating Securities to Reach 50% Target... 33 Section 4: Maintaining the US Equity Indices... 35 4.1 Semi Annual Index Review... 35 4.1.1 Semi Annual Index Review Process for Market Capitalization Indices36 4.1.2 Semi Annual Index Review Changes in DIFs and Number of Shares36 4.1.3 Semi Annual Index Review Process for Value and Growth Indices. 37 4.1.4 Semi Annual Index Review Frequency and Timing of Implementation... 37 4.1.5 Date of Data Used for Semi Annual Index Review... 37 4.2 Quarterly Index Review... 37 4.2.1 Quarterly Index Review Changes in Constituents of the Market Capitalization Indices... 38 3 of 65

4.2.2 Quarterly Index Review Changes in DIFs and Number of Shares... 38 4.2.3 Quarterly Index Review Changes in Constituents of the Value and Growth Indices... 38 4.2.4 Quarterly Index Review Frequency and Timing of Implementation 39 4.2.5 Date of Data Used for Quarterly Index Review... 39 4.3 Ongoing Event Related Changes... 39 4.3.1 Corporate Events Affecting Existing Index Constituents... 40 4.3.1.1 Changes in Characteristics of Existing Constituents... 40 4.3.1.2 Early Inclusions of Non Index Constituents... 41 4.3.1.3 Early Deletions of Existing Index Constituents... 42 4.3.2 Corporate Events Affecting Non Index Constituents... 43 4.3.2.1 IPOs and Other Early Inclusions... 43 4.4 Announcement Policy... 44 4.4.1 Semi Annual Index Review... 44 4.4.2 Quarterly Index Review... 44 4.4.3 Ongoing Event Related Changes... 44 4.4.3.1 IPOs and Other Early Inclusions... 45 4.4.3.2 Global Industry Classification Standard (GICS)... 45 Appendix I: Country Classification of Securities... 46 Appendix II: Free Float Definition and Estimation Guidelines48 Appendix III: Global Industry Classification Standard (GICS).. 51 Appendix IV: variable definitions and computations... 57 Appendix V: Calculation of market mean and standard deviation... 62 Appendix VI: Policy regarding market closures during index reviews... 63 Appendix VII: Quarterly and Semi annual Index Review changes in DIF... 64 Client Service Information is Available 24 Hours a Day... 65 Notice and Disclaimer... 65 About MSCI... 65 4 of 65

Section 1: US Equity Indices Methodology Overview Introduction For over 30 years, MSCI has been constructing global equity benchmark indices that contribute to the international investment management process. These indices serve as relevant and accurate performance benchmarks, effective research and asset allocation tools, and are used as the basis for various investment vehicles designed to gain and/or manage exposure to international markets. As such, the MSCI international equity indices fulfill the investment needs of a wide variety of international investors. In constructing these indices, MSCI consistently applies its equity index construction and maintenance methodology across developed and emerging markets. This consistency of approach makes it possible to aggregate individual country and industry indices to create meaningful regional and composite benchmark indices for investing internationally. MSCI is now proceeding with the development of US equity benchmark indices from the perspective of US domestic investors. In this regard, this methodology book presents the methodology, which is used to construct and maintain a family of MSCI US Equity Indices. This new index series reflects the full breadth of investment opportunities across market capitalization size, value and growth investment styles and industry and sector groups within the US equity market. 1.2 Defining the US Equity Market Capitalization Segments and Indices In constructing the MSCI US Equity Market Capitalization Indices, MSCI has adopted a broad index structure that reflects the full breadth of investment opportunities across market capitalization size in the US equity markets in which companies and their securities are categorized into different market capitalization segments and indices that are defined by a fixed number of companies. 2.1.1 Defining the US Equity Universe MSCI includes in the eligible US equity universe all listed equity securities of US incorporated companies listed on the NYSE, NYSE Arca, AMEX, and the NASDAQ, except investment trusts (other than REITs), preferred REITs, mutual funds (other than Business Development Companies), equity derivatives, limited partnerships, limited liability companies and business trusts that are structured to be taxed as limited partnerships, and royalty trusts. When appropriate, some non US incorporated companies may also be considered for inclusion in the MSCI US equity universe based on an analysis and interpretation of a number of factors. Some of these factors include the company s main equity trading markets, shareholder base and geographical distribution of operations (in terms of assets and production). 5 of 65

2.1.2 Defining the Market Capitalization Segments and Indices MSCI segregates the eligible US equity universe in three market capitalization segments, namely: The investable market segment The micro cap segment, and The lower micro cap segment The design and structure of the market capitalization segments and indices are represented in the following page. 300 750 MSCI US Equity Indices: Market Capitalization Segments and Indices (Number of Companies) 2500 US Equity Universe Broad Market Investable Market (2500) Large Cap Prime Market (300) (750) Mid Cap (450) Small Cap (1750) Micro Cap The investable market segment includes all eligible securities with reasonable size, liquidity, and investability that can cost effectively be represented in institutional and pooled retail portfolios of reasonable size. This segment also allows investors to gain exposure to a significant portion of the performance of the US equity universe. Analysis shows that the 2,500 largest companies by full market capitalization, which cover more than 98% of the US equity universe, form an appropriate representation of the investable market segment. The investment performance characteristics of this investable market segment is represented and measured by an Investable Market Index. The micro cap segment will comprise micro cap companies with a market capitalization rank lower than the 2,500 companies in the investable market segment and included in the top 99.5% of the US equity universe ranked by full market capitalization. The micro cap segment is estimated to cover around 1.5% 6 of 65

of the market capitalization of the US equity universe. The investment performance characteristics of this segment of the US equity universe is represented and measured by a Micro Cap Index. The lower micro cap segment covers approximately the bottom 0.5% of the full market capitalization of the US equity universe, and will not be represented by an index. The combination of the Investable Market Index and the Micro Cap Index will form the US broad market index, which thus includes the companies comprised in the top 99.5% of the US equity universe ranked by full market capitalization. 1.2.2.1 Defining the Large, Mid and Small Market Capitalization Segments and Indices The investable market segment and index is comprised of three market capitalization segments and their corresponding indices large cap, mid cap, and small cap. MSCI defines the large cap index as consisting of the 300 largest companies by full market capitalization in the investable market segment, the Mid Cap Index as comprising the next 450 companies, and the Small Cap Index as consisting of the remaining 1,750 companies. The large cap and the mid cap indices, as defined above, are also combined to create a separate index of the 750 largest companies in the investable market segment ranked by full market capitalization. MSCI uses a fixed number of companies for defining the cut off levels for the market capitalization segments. Analysis shows that using a fixed number of companies to specify market capitalization cutoff levels leads to better stability and lower turnover in the resulting market capitalization indices over time, when compared to using other factors to define market capitalization segments, such as percentiles of market capitalization or absolute market capitalization levels. In making a determination as to what levels of a fixed number of companies appropriately define the various market capitalization segments within the investable market segment, MSCI considered the behavior of several factors over time using different levels of fixed number of companies. The factors include the following: The absolute market capitalization level of the smallest company. The marginal contribution to the relevant index of the smallest company. The cumulative proportion of market capitalization covered. The liquidity and trading characteristics of companies. An analysis of the average size of portfolio holdings of a variety of large, mid cap, and small cap investment managers. MSCI periodically reviews the factors mentioned above and the resulting market capitalization cut off levels in order to ensure that they continue to appropriately define the various market capitalization 7 of 65

segments. In the event of a structural change that permanently alters the capitalization characteristics and make up of the equity market, MSCI may need to change the number of companies in each of the various market capitalization segments. Since companies and their securities are assigned to the appropriate market capitalization segments and indices based on their company full market capitalization, consequently, all securities of the same company are always classified in the same market capitalization segment and index and there may be more securities than companies within each market capitalization segment and index. 1.2.3 Market Capitalization Index Reviews and Buffer Zones The MSCI US Equity Indices are managed with the objective of reflecting the evolution of equity markets and equity market segments in a timely fashion. In reviewing its various sub indices, MSCI s goal is to strike a balance between ensuring that the various indices continue to accurately reflect the different investment processes and their opportunity sets and at the same time minimize index turnover. In this regard, and consistent with the index methodology employed in maintaining existing MSCI international equity indices, MSCI reflects corporate events in the indices as they occur. In addition, the market capitalization indices are also fully reviewed on a semi annual basis, at the end of May and November, and partially reviewed at the end of February and August. During these index reviews, MSCI uses buffer zones to manage the migration of companies from one market capitalization index to another. For instance, an asymmetrical stock buffer zone, consisting of 100 companies on the upside and 150 companies on the downside, is used around the market capitalization cutoff levels between the large cap and the mid cap indices. This buffer zone implies that, once the market capitalization sub indices have been constructed according to the design mentioned above, an existing constituent will leave the large cap index when it drops to a market capitalization rank of 451. Similarly, a mid cap company will enter the large cap index when it reaches a market capitalization rank of 200. Buffers zones are also used between the mid cap and the small cap indices and between the small cap and the micro cap indices, as shown in the table below. Upside and Downside Buffer Zones for Market Capitalization Indices (Company Rank) Large Cap Mid Cap Small Cap Micro Cap Market Capitalization Segment Definition 1 300 301 750 751 2500 Upside Buffer Zone 201 300 551 750 1851 2500 Downside Buffer Zone 301 450 751 1100 2501 3000 8 of 65

Buffer Zones by Market Capitalization Index Large Cap Mid Cap 201 301 450 300 Small Cap 551 750 751 1100 2501 3000 During the May and November semi annual index reviews, the process of the index review ensures that the market capitalization indices contain the number of companies originally used to define each market capitalization segment. For example, the large cap and the mid cap indices will contain 300 and 450 companies, respectively. The process of bringing the market capitalization indices back to the original cut off levels are applied after allowing for the migration of companies outside of the buffer zones to their appropriate index. For instance, after applying the buffer zones, if the number of companies in the large cap index were smaller than 300, the largest mid cap companies are migrated to the large cap index until the number of companies reach 300. If the large cap index were to contain more than 300 companies, the smallest large cap companies are migrated to the Mid Cap Index until the number of companies equal 300. A similar process is applied for the migration of constituents between the mid cap and the small cap indices and, between the small cap and the micro cap indices. 1.3 Defining the US Equity Value and Growth Investment Styles and Indices In constructing the MSCI US Equity Style Indices, MSCI has adopted a two dimensional framework for style segmentation in which value and growth securities are categorized using different attributes. In addition, multiple factors are used to identify value and growth characteristics. 1.3.1 Multi Factor Approach The value investment style characteristics for index construction are defined using the following three variables: 9 of 65

Book value to price ratio (BV / P) 12 month forward earnings to price ratio (E fwd / P) Dividend yield (D / P) The growth investment style characteristics for index construction are defined using the following five variables: Long term forward earnings per share (EPS) growth rate (LT fwd EPS G) Short term forward EPS growth rate (ST fwd EPS G) Current Internal Growth Rate (g) Long term historical EPS growth trend (LT his EPS G) Long term historical sales per share (SPS) growth trend (LT his SPS G) 1.3.2 Two Dimensional Framework Using the variables mentioned above, value z scores and growth z scores are calculated and used to determine the overall style characteristics of each security in the MSCI value and growth style space, as depicted in Exhibit 1. In the two dimensional framework, non value does not necessarily mean growth, and vice versa. Additionally, some securities can exhibit both value and growth characteristics, while others may exhibit neither. Exhibit 1 MSCI Value and Growth Style Space Value 4.0 3.0 Value (and Non-Growth) 1 2.0 Value and Growth 3 1.0 Non-Growth 0.0-4.0-3.0-2.0-1.0 0.0 1.0 2.0 3.0 4.0 Growth -1.0 Non-Value and Non-Growth 4-2.0-3.0 Growth (and Non-Value) 2-4.0 Non-Value Note: The values on the axes are z scores. The point where the value and non value axis intersects growth and non growth axis, i.e., the origin, is located at a z score of zero for each axis. 10 of 65

Hence, under the two dimensional framework for style segmentation, a security can have the following four style characteristics: 1. A security with a positive value z score and a negative or zero growth z score is situated in the Value (and Non Growth) quadrant as it exhibits clear value characteristics. 2. A security with a negative or zero value z score and a positive growth z score is situated in the Growth (and Non Value) quadrant as it exhibits clear growth characteristics. 3. A security with a positive value z score and a positive growth z score is situated in the Value and Growth quadrant as it exhibits both value and growth characteristics. 4. A security with a negative or zero value z score and a negative or zero growth z score is situated in the Non Value and Non Growth quadrant as it exhibits both non value and non growth characteristics. 1.3.3 Index Design The objective of the value and growth indices is to divide constituents of an underlying market capitalization index, into a value index and a growth index, each targeting 50% of the free float adjusted market capitalization of the underlying market capitalization index. The market capitalization of each constituent should be fully represented in the combination of the value index and the growth index, and, at the same time, should not be double counted. A security may, however, be represented in both the value index and the growth index at a partial weight. 1.3.4 Universe for Style Segmentation MSCI adopts a market capitalization index specific approach in conducting the style segmentation of the value and growth indices. Securities in each market capitalization index are allocated to the appropriate value and growth indices. The same style segmentation process is applied independently and consistently across all market capitalization indices. The consistent application of index methodology to all market capitalization indices also makes it possible to apply a building block approach in the construction of broad market style indices. Under this approach, individual value and growth indices can be aggregated to create various meaningful and comparable broad market style indices. The value and growth style classification and allocation is applied at the security level rather than at the company level and the value and growth indices exist only for the investable market segment and index. 11 of 65

1.3.5 Construction of the Value and Growth Indices In order to achieve the above mentioned index design, MSCI constructs and maintains the value and growth indices by allocating securities and their free float adjusted market capitalizations to the appropriate value and growth indices, during the semi annual style index reviews of May and November. MSCI s construction of the value and growth indices for each market capitalization index involves the following five steps: Determining the values of the variables used to specify value and growth characteristics for each security. Calculating the z scores of each variable for each security. Aggregating the style z scores for each security to determine the security s overall style characteristics. Assigning initial style inclusion factors for each security. Achieving the 50% free float adjusted market capitalization target by allocating securities to the value and growth indices after applying buffer rules. 1.4 Free Float Adjusting Constituent Weights in US Equity Indices Although the full market capitalization of companies is used as the basis for determining the various market capitalization segments and indices, MSCI free float adjusts the market capitalization of constituents in the US Equity Indices in order to reflect the availability of shares from the perspective of US domestic investors. MSCI defines the domestic free float of a security as the proportion of shares outstanding that are deemed available for purchase in the public equity markets by US domestic investors. Therefore, domestic free float excludes strategic investments in a company, such as stakes held by federal, state and local governments and their agencies, controlling shareholders and their families, the company s management or another company. No foreign ownership limit is applied in the domestic free float calculation. 1.5 Global Industry Classification Standard (GICS) MSCI has designed, in conjunction with Standard & Poor s, the Global Industry Classification Standard (GICS), which provides a universal approach to industry classification of securities and forms the basis for achieving MSCI s objective of reflecting broad and fair industry representation in its international equity indices. MSCI applies the GICS to the construction and maintenance of its US Equity Indices. Common features between MSCI US domestic and international equity indices, such as the use of the 12 of 65

GICS, improves investors ability to better measure and monitor the risk and attribute the performance of global equity portfolios. In the next sections, we review each of these factors and steps in detail. 1.6 Initial Construction of US Equity Indices and its History MSCI started calculating and maintaining the ongoing Investable Market Index on December 2, 2002 with a base level of 1000 as of November 29, 2002. The initial construction of this index used market capitalizations as of November 25, 2002 and no buffer rules were applied on the Market Capitalization or Style Indices. MSCI started calculating and maintaining the ongoing Broad Market Index and the Micro Cap Index on June 2, 2003 with a base level of 1000 as of May 30, 2003. In addition, MSCI has calculated daily price and total return index levels for the Investable Market Index, from May 31, 1992 to November 29, 2002. The methodology used for the historical calculation is basically the same as that of the ongoing index. The main difference is the use of full market capitalization weights for the historical indices instead of free float adjusted market capitalization weights for the ongoing indices. 13 of 65

Section 2: Constructing the US Market Capitalization Indices MSCI undertakes an index construction process for the market capitalization indices, which involves: Creating the US equity universe. Screening securities for investability. Assigning securities to appropriate market capitalization indices, after applying buffer rules. Once securities have been selected as index constituents, the full market capitalization of all selected constituents is adjusted for free float available to US domestic investors. In addition, they are classified in their appropriate industry classification based on the Global Industry Classification Standard (GICS). 2.1 Creating the US Equity Universe The index construction process begins with the creation of the US equity universe. MSCI includes in the US equity universe all listed equity securities, or listed securities that exhibit characteristics of equity securities, of US incorporated companies listed on the NYSE, AMEX or the NASDAQ (both NASDAQ National Market and NASDAQ Small Cap Market). Shares of non US incorporated companies, investment trusts (other than REITs), preferred REITs, mutual funds (other than Business Development Companies), equity derivatives, limited partnerships, limited liability companies and business trusts that are structured to be taxed as limited partnerships, and royalty trusts are generally not eligible for inclusion in the universe. When appropriate, some non US incorporated companies trading in the US may also be considered for inclusion in the US equity universe based on a number of factors described in Appendix I, entitled Country Classification of Securities. Additionally, some US incorporated companies trading in the US may be excluded from the US equity universe. Some of the factors used to determine the appropriate country classification include the company s main equity trading markets, shareholder base and geographical distribution of operations (in terms of assets and production). In addition, the company s regulatory filings provide useful insights regarding the company and the regulator s perception of its relevant country affiliation. A comprehensive review of the total US equity universe is conducted to create the US equity universe in order to ensure a broad and fair representation of the full breadth of investment opportunities across the total US equity universe in the US Equity Indices. 14 of 65

2.2 Screening Securities for Investability After determining the US equity universe, MSCI screens securities for investability using various factors. Each security of a company is screened and selected for index inclusion based on its own merits, as different share classes of a company are not assimilated. As such, the inclusion or deletion of one security does not imply the automatic inclusion or deletion of the other securities of the same company. The assessment of a security s investability is determined with the following screens and a security must pass all the screens in order to be considered for index inclusion in the Investable Market Index: Liquidity. Length of trading. Company and security free float. Relative security free float adjusted market capitalization. For securities that are considered for inclusion or are currently included in the Micro Cap Index, the liquidity screen and the relative security free float adjusted market capitalization screens are not applied. In addition, all new companies and securities that are considered for inclusion in the Micro Cap Index must have a company full market capitalization of at least USD 20 million. Current eligible constituents of the Micro Cap Index can remain in the Micro Cap Index, unless their company full market capitalization falls below USD 10 million Companies that migrate from the Micro Cap Index to the Investable Market Index must have adequate liquidity and must pass other investability criteria applicable for the Investable Market Index. 2.2.1 Liquidity All securities that are considered for inclusion or are currently included in the Investable Market Index must be characterized by adequate liquidity, which is measured along two dimensions. One is based on the level of a stock price and the other is a relative liquidity screening using a direct relative liquidity measure known as the Annualized Traded Value Ratio (ATVR). Concerning the level of a stock price, there may be liquidity issues for securities trading at a very low or a very high stock price. By and large, the issue of securities trading at a very low stock price is addressed by the stock exchanges directly, with rules to delist securities trading below a stock price of USD 1. However, no comparable rules exist for securities trading at a very high stock price. Hence, a limit of USD 5,000 has been set and securities with stock prices above USD 5,000 fail the liquidity screening. 15 of 65

The relative liquidity screening is conducted by ranking all securities in the US equity universe in descending order of ATVR after excluding those securities trading above USD 5,000. The ATVR of each security is calculated in a 3 step process described below: First, monthly median traded values are computed using the daily median traded value, multiplied by the number of days in the month that the security traded. The daily traded value of a security is equal to the number of shares traded during the day, multiplied by the closing price of that security. The daily median traded value is the median of the daily traded values in a given month. Second, the monthly median traded value ratio is obtained by dividing the monthly median traded value of a security by its full market capitalization at the end of the month. Third, the ATVR is obtained by taking the average of the monthly median traded value ratios of the previous 12 months or the number of months for which this data is available and multiplying it by 12. Securities that belong to the top 99.5% of the cumulative security full market capitalization of the US equity universe in descending order of ATVR, after excluding those securities trading above USD 5,000, are eligible for inclusion in the Investable Market Index. Existing Investable Market Index constituents can remain in the index until they fall below 99.75% of the cumulative security full market capitalization as described above. Current Micro Cap Index securities that migrate to the Investable Market Index can be added to the Investable Market Index if they rank within 99.75% of the cumulative security full market capitalization as described above. Securities that have failed the liquidity screening previously or have been excluded from the indices as their ATVR fell below the 99.75% level are eligible for inclusion only when they rank within the top 99.25% of the cumulative security full market capitalization as described above. 2.2.2 Length of Trading A seasoning period of at least three calendar months is required for all new issues of small companies at the time of the eligible US equity universe creation. This seasoning period helps MSCI assess the investability of securities of small companies, which are defined as those having company full market capitalization rank below 750 in the Investable Market Index. IPOs and newly listed securities with a company full market capitalization rank equal to or above 750 in the Investable Market Index do not need to satisfy this condition. 16 of 65

2.2.3 Company and Security Free Float Securities with a company DIF less than 0.10 and/or a security DIF less than 0.15 are generally not eligible for inclusion in the Broad Market Index. For a security of a company with a company DIF less than 0.10 and/or security DIF less than 0.15 to be eligible for inclusion to the Investable Market Index, the free float adjusted market capitalization of the security must represent at least: 5 basis points of the current Investable Market Index. In the case of an existing Investable Market Index constituent, if the company DIF decreases to less than 0.10 and/or the security DIF decreases to less than 0.15, or if an existing constituent that was included in the index with a company DIF below 0.10 and/or a security DIF below 0.15 experiences a further decrease in DIF, in order to remain in the index, the free float adjusted market capitalization of the security must represent at least: 5 basis points of the current Investable Market Index, if the existing constituent experienced decreases in free float after its inclusion in the indices. 2.2.4 Relative Security Free Float Adjusted Market Capitalization In general, all securities that are considered for inclusion in the Investable Market Index should have a free float adjusted security market capitalization representing at least 10% of the company full market capitalization. For a security with a free float adjusted security market capitalization representing less than 10% of the company full market capitalization to be eligible for inclusion in the Investable Market Index, the free float adjusted market capitalization of the security must represent at least: 5 basis points of the current Investable Market Index. For an existing Investable Market Index constituent with a free float adjusted security market capitalization representing less than 10% of the company full market capitalization to be eligible to remain in the indices, the free float adjusted market capitalization of the security must represent at least: 2.5 basis points of the current Investable Market Index, if the existing constituent was previously included in the indices with a free float adjusted security market capitalization representing less than 17 of 65

10% of the company full market capitalization and this proportion relative to the company has not decreased since then. 5 basis points of the current Investable Market Index, if the existing constituent experienced decreases in the free float adjusted security market capitalization relative to the company full market capitalization after its inclusion in the indices. 2.3 Assigning Securities to Market Capitalization Indices Assigning securities to the appropriate market capitalization indices involves a fine balance between the following objectives: Reflecting changes in the market capitalization size of companies and their securities. Reconstituting the indices to contain the number of companies originally used to define each market capitalization index. Avoiding unnecessary index turnover. Hence, a careful comparison of a security s old and new market capitalization rank and index is necessary. The process of assigning securities to their market capitalization indices involves: Preliminarily assigning securities to a market capitalization index based on their new company full market capitalization rank. Using buffer rules to manage the migration of securities between market capitalization indices. Assigning the securities to their final market capitalization index. 2.3.1 Preliminary Attribution of Securities to Market Capitalization Indices After selecting the eligible and investable securities of companies, these are preliminarily assigned to their new market capitalization indices. This is achieved by ranking all selected securities of companies in descending order of company full market capitalization and selecting securities of companies for each market capitalization index until the aggregate number of companies is reached. Company full market capitalization incorporates the full market capitalization of all listed and unlisted securities of the same company. The table in the next page illustrates the company full market capitalization rank range and number of companies in each market capitalization index. 18 of 65

Market Capitalization Company Full Market Number of Indices Capitalization Rank Range Companies MSCI US Large Cap 300 1 300 300 MSCI US Mid Cap 450 301 750 450 MSCI US Small Cap 1750 751 2500 1750 Eligible companies included in top 99.5% of the US MSCI US Micro Cap Equity Universe, but not part of IMI. No set number of companies is targeted. MSCI US Prime Market 750 1 750 750 MSCI US Investable Market 2500 1 2500 2500 MSCI US Broad Market Represents at least 99.5% of the US Equity Universe No set number of companies is targeted. The Broad Market Index is the combination of the Investable Market Index and Micro Cap Index, and represents at least 99.5% of the US equity universe. For the Micro Cap Index, no fixed number of companies is targeted. All securities that are included in the top 99.5% of the US equity universe and are not part of the Investable Market Index are preliminarily attributed to the Micro Cap Index provided their company full market capitalization is at least USD 20 million. 2.3.2 Migration of Securities between Market Capitalization Indices The migration of securities between market capitalization indices is controlled by using buffer zones. However, in order to avoid that constituents, which repeatedly fall within the buffer zones end up distorting the representation of the various market capitalization indices, a maximum is set to the length of time constituents can remain in the buffer zones during the semi annual index reviews. 2.3.2.1 Buffer Zones For an existing constituent with a company full market capitalization rank falling outside of the original market capitalization segment range definition to be eligible to remain in its current market capitalization index, its company full market capitalization rank must lie within the following buffer zones: Upside and Downside Buffer Zones for Market Capitalization Indices (Company Rank) Large Cap Mid Cap Small Cap Micro Cap Market Capitalization Segment Definition 1 300 301 750 751 2500 Upside Buffer Zone 201 300 551 750 1851 2500 Downside Buffer Zone 301 450 751 1100 2501 3000 19 of 65

An asymmetrical buffer zone consisting of 100 companies on the upside and 150 companies on the downside is used around the market capitalization cut off levels between the large cap and the mid cap indices. For example, a constituent company and its securities leave the large cap index when its company full market capitalization rank falls below 450. Similarly, a constituent company and its securities in the Mid Cap Index enter the large cap index when it reaches company full market capitalization rank of 200. Likewise, an asymmetrical buffer zone consisting of 200 companies on the upside and 350 companies on the downside is applied around the market capitalization cut off levels between the mid cap and the small cap indices. Finally, at the lower end of the market capitalization spectrum, asymmetrical buffer zone, consisting of 650 companies on the upside and 500 companies on the downside is applied around the market capitalization cut off point of the small cap and the micro cap indices. The buffer zones are used to manage constituent migration during quarterly index reviews and semiannual index reviews. During the quarterly index reviews, buffer zones are used within the Investable Market Index and the Micro Cap Index separately, and hence there is no migration of constituents between the two indices. During the semi annual index reviews, the buffer zones are used across all constituents within the eligible US equity universe and therefore, there is migration of companies and their securities across the broad market index. 2.3.2.2 Maximum Length of Time in the Buffer Zones If a constituent falls in the same buffer zone for four consecutive semi annual index reviews, it will be re classified to the appropriate market capitalization index at the fourth semi annual index review. Under this rule, for instance, if a large cap constituent is ranked between 301 and 450 for four consecutive semi annual index reviews, it is re classified in the Mid Cap Index at the fourth semi annual index review. Likewise, if a Mid Cap Index constituent is ranked between 201 and 300 for four consecutive semi annual index reviews, it is re classified in the large cap index. In addition, if a mid cap constituent is ranked between 751 and 1100 for four consecutive semi annual index reviews, it is reclassified in the Small Cap Index. In the case of a small cap constituent, if it is ranked between 551 and 750 for four consecutive semi annual index reviews, it is re classified in the Mid Cap Index. If the small cap constituent is ranked between 2501 and 3000 for four consecutive semi annual index reviews, it is re classified in the Micro Cap Index. Likewise, if a Micro Cap Index constituent is ranked between 1851 and 2500 for four consecutive semi annual index reviews, it is re classified in the Small Cap Index, provided it passes the investability screens for the Investable Market Index. This re classification rule is only applicable during the semi annual index reviews. For further details on the quarterly index review and the semi annual index review, see Section 4, entitled Maintaining the US Equity Indices. 20 of 65

2.3.3 Final Attribution of Securities to Market Capitalization Indices After using the buffer rules to manage the migration of constituents, securities of companies within each market capitalization index are ranked again by descending company full market capitalization and the number of companies is counted. If the number of companies in an index is less than the original number of companies that correspond to the index, the securities of the largest companies from the next largest index are migrated into the index until the original number of companies is reached. On the other hand, if the number of companies in an index is more than the original number of companies used to define the market capitalization index, the securities of the smallest companies within that index are migrated out of the index and into the next largest index until the original number of companies is reached. For instance, after applying the buffer rules, if the number of companies in the large cap index is more than 300, the smallest securities by company full market capitalization in the large cap index are migrated to the Mid Cap Index from the large cap index until the number of companies in the large cap index equals 300. If the number of companies is less than 300, the largest securities by company full market capitalization in the Mid Cap Index are migrated to the large cap index until the number of companies equal 300. This step is repeated for all the other market capitalization indices of the US Equity Indices. It is only at the semi annual index reviews that the final attribution of securities to market capitalization index occurs, ensuring that the market capitalization indices in the investable market segment contain the number of companies originally used to define each market capitalization segment. All securities that are included in the top 99.5% of the US equity universe and are not part of the Investable Market Index will be included in the Micro Cap Index, provided they pass the investability screen for Micro Cap Index securities as outlined in section 2.2 and their company full market capitalization is at least USD 20 million. Current eligible constituents of the Micro Cap Index are not deleted from the Micro Cap Index, until their company full market capitalization falls below USD 10 million, they cross the micro cap upper buffer of rank of 1850 or they are added to the Investable Market Index to fill any vacancies created. 2.4 Adjusting the Full Market Capitalization of Selected Securities for Free Float After selecting and assigning the securities to their appropriate market capitalization indices, MSCI calculates the free float adjusted market capitalization of each security in order to represent the securities in the US Equity Indices at their investable weight. The process of free float adjusting market capitalization involves: Defining and estimating the free float available to US domestic investors for each security. Assigning a free float adjustment factor to each security. Calculating the free float adjusted market capitalization of each security. 21 of 65

2.4.1 Defining and Estimating Free Float In the context of the US Equity Indices, MSCI defines the free float of a security as the proportion of shares outstanding that are deemed available for purchase in the public equity markets by US domestic investors. In practice, limitations on free float available to US domestic investors include strategic and other shareholdings not considered part of available free float. For further details on the MSCI free float definition, see Appendix II, entitled Free Float Definition and Estimation Guidelines. 2.4.1.1 Estimation of Free Float Available to US Domestic Investors The free float of a security is estimated as its total number of shares outstanding less shareholdings classified as strategic and/or non free float. Examples of shares excluded from free float are stakes held by strategic investors such as governments, corporations, controlling shareholders and management. No foreign ownership limit is taken into consideration in the free float calculation. Non Free Float Shareholdings (%) = Number of Shares Classified as Non Free Float divided by the Total Number of Shares Free Float (%) = 100% minus Non Free Float Shareholdings (%) 2.4.2 Assigning a Free Float Adjustment Factor MSCI free float adjusts the market capitalization of each security in the MSCI US Equity Indices using an adjustment factor, referred to as the Domestic Inclusion Factor (DIF). For securities with free float greater than 15%, the DIF is equal to the estimated free float, rounded up to the closest 5%. For securities with free float less than 15%, the DIF is equal to the estimated free float, rounded to the closest 1%. 2.4.3 Calculating the Free Float Adjustment Security Market Capitalization The free float adjusted market capitalization of a security is calculated as the product of the DIF and the security s full market capitalization. Free Float Adjusted Market Capitalization = DIF times the Security s Full Market Capitalization 22 of 65

The example below illustrates the calculation of the free float adjusted market capitalization of securities. Example: Calculating Free Float Adjusted Market Capitalization of Securities: Suppose ABC Corp has two listed securities, Class A and B, and one unlisted security, Class C. Class A Class B Class C Total number of shares outstanding 10,000,000 10,000,000 10,000,000 Number of shares classified as non free float 4,300,000 8,760,000 10,000,000 Non free float shareholding (%) 43.0% 87.6% 100% Free float (%) 57.0% 12.4% 0% Domestic Inclusion Factor (DIF) 0.60 0.12 0 Market price ($) 500 100 500* Full market capitalization ($ mm) 5,000 1,000 5,000 Free float adjusted market capitalization ($ mm) 3,000 120 0 * Where each Class C share can be converted into 1 Class A share. To price unlisted securities for the calculation of company market capitalization, MSCI uses the price of the listed security to which the unlisted security can be converted into, adjusted for the conversion ratio. The conversion ratio is defined as the number of listed securities for which each unlisted security will be converted into. For example, if each unlisted security is converted into two listed securities, then the conversion ratio is 2. If the unlisted security is not convertible to another listed security, or if the conversion ratio is not available, it is assumed to be convertible to the listed security that displays the most similar characteristics as the unlisted security. 2.5 Classifying Securities under the Global Industry Classification Standard (GICS) All selected securities are assigned to the industry that best describes their business activities. To this end, MSCI has designed, in conjunction with Standard & Poor s, the Global Industry Classification Standard (GICS). This comprehensive classification scheme provides a universal approach to industries worldwide and forms the basis for achieving MSCI s objective of reflecting broad and fair industry representation in its indices. Under the Global Industry Classification Standard (GICS), each company is assigned uniquely to one subindustry according to its principal business activity. Therefore, a company can only belong to one industry grouping at each of the four levels of the GICS, which consists of 10 sectors, 24 industry groups, 68 industries, and 154 sub industries. For further details on the GICS, see Appendix III, entitled Global Industry Classification Standard (GICS). 23 of 65

Section 3: Constructing the US Value and Growth Indices After constructing the US market capitalization indices based on rules described in Section 2, MSCI constructs the value and growth indices for each of the large cap, mid cap and small cap indices, which involves: Determining the values of the variables used to specify value and growth characteristics for each security. Calculating the z scores of each variable for each security. Aggregating the style z scores for each security to determine the security s overall style characteristics. Assigning initial style inclusion factors for each security. Achieving the 50% free float adjusted market capitalization target by allocating securities to the value and growth indices after applying buffer rules. 3.1 Variables Used to Specify Value and Growth Characteristics The value and growth indices construction process begins by determining the values of the variables used to specify value and growth characteristics. The value investment style characteristics for index construction are defined using the following three variables: Book value to price ratio (BV / P) 12 month forward earnings to price ratio (E fwd / P ) Dividend yield (D / P) For these variables, securities of the same company may have different values due to different security prices. In addition, the dividend rate may differ from one security to another of the same company. As a result, in certain circumstances, one security of a company may be classified as value and another as growth. In the above three variables, the price is used in the denominator in order to compute meaningful market means and standard deviations for these variables. The growth investment style characteristics for index construction are defined using the following five variables: Long term forward earnings per share (EPS) growth rate (LT fwd EPS G) Short term forward EPS growth rate (ST fwd EPS G) Current Internal Growth Rate (g) 24 of 65